The Serious Disadvantages of Bitcoin

You’ve all heard about Bitcoin. No one knows who created it, although some writers have made very educated guesses about the identity of the pseudonymous creator. I have sometimes wondered whether Bitcoin is the product of some transnational criminal organization or rogue state that wants to undermine developed economies by casting their payment systems into doubt. I am less concerned with Bitcoin’s origin than with its flaws. I shall enumerate those flaws forthwith.

Bitcoin enables fraud and other criminal activities. This is absolutely the single most salient feature of Bitcoin’s anonymity. Conventional currencies are indeed subject to laundering and counterfeit. There is probably no way to eliminate those risks completely. Bitcoin magnifies those risks because it can only be exchanged anonymously. It dominates dark networks that have been known to traffic in narcotics. Law enforcement efforts to shut those networks down will terminate the ability of any financial actor to transact in Bitcoins even for legitimate reasons. When the network is down, your Bitcoins are gone. Conventional currency doesn’t work that way in real transactions. Banks and brokerages have offsite business continuity backups. Securities exchanges and central banks maintain counterparty records. These mechanisms lack Bitcoin’s anonymity but make up for that in resiliency and trustworthiness.

Digital QR codes make it vulnerable to theft. One Bloomberg TV anchor learned this the hard way. Transmuting digital Bitcoins into a paper medium means the QR code reveals their underlying location. Scanning that QR code means anyone can anonymously steal Bitcoins. That’s the bad part about anonymizing a currency. Masking ownership means no audit trail to recover a thief’s digital fingerprints.

Mining Bitcoins is a health hazard and energy sink. People run obsolete hardware just because the video cards can process random digits into raw Bitcoins. This is a kind of “mining” that’s unlike the real-world mining I’ve studied for years, because it transforms nothing into an encrypted version of nothing. Nerds who run multiple machines overnight to mine Bitcoin risk heat stroke from the machines. If you don’t believe me, do a Google search of “Bitcoin heat” and note all of the cooling problems Bitcoin miners discuss amongst themselves, with the real world watching them fry. Crypto-nerds advocate data furnaces as an economic solution to waste heat generation from Bitcoin mining. Gimme a break already. There is no way a distributed network of Bitcoin mining operations could ever be a backbone for currency transactions or an alternate energy grid. No cloud provider in its right mind will ever farm out data storage needs to distributed servers with zero physical security. Bitcoin’s so-called solutions just multiply its problems.

There is no central bank for Bitcoin. Indeed, there never will be one, because Bitcoin’s evasion of central control appeals to its users. The Federal Reserve, for all of its flaws, has enabled the US to withstand financial panics because it could manage a unified national currency. A central bank manages fractional reserve lending that allows a national economy to expand. The supply of crypto-currency is limited by algorithmic design, so an economy running on Bitcoin cannot expand to accommodate a larger population or natural resource base. A Bitcoin economy cannot grow because it cannot deploy excess capital for innovation.

Minting copycat currencies is easy. Run through the gamut of crypto-currencies like Litecoin, Dogecoin, Namecoin, Peercoin, and others to see how unserious most crypto-currency enthusiasts are about money. Dogecoin in particular is obviously a joke based on an Internet meme. Using a currency named after memes doesn’t impress me. Imagine someone in the early 20th Century printing a dollar with Mickey Mouse’s smiling visage and convincing others to take it seriously. The US economy tolerated decentralized currency minting for some of its history until the settlement of the frontier demanded a nationally integrated economy. Copycat currencies destroy the credibility of Bitcoin.

I am totally convinced that Bitcoin is at best a joke and at worst a fraud. Hi-tech startups should be be radical, disruptive, transformational, chaotic, revolutionary, and all that but those are not the characteristics of a currency. People who use currencies as a medium of exchange and store of value need them to have conservative characteristics, so that one unit today has pretty much the same value next year. Stability enables consumption and investment in reliable amounts at acceptable intervals among counterparties. Bitcoin does not accomplish these purposes.

Bitcoin is baloney. I’m waiting for some jokester to create Baloneycoin that will evaporate when minted and play some funny animation. Look up “Cosbycoin” for an early attempt at turning this idea into a joke. The parody site that features Cosbycoin is hilarious but the real joke is on anyone who takes Bitcoin seriously as an investment. I do not use Bitcoin, nor will I do business with anyone who wants to transact in Bitcoin. I may be a nerd but I’m far too intelligent to use something as stupid as Bitcoin.

Anthony Alfidi is the Founder and CEO of Alfidi Capital. His firm publishes free investment research with honesty and humor.

Mr. Alfidi holds a Bachelor's degree in human resource management from the University of Notre Dame (cum laude) and an MBA in finance from the University of San Francisco. He is a life member of Beta Gamma Sigma, the academic honor society for business majors. He has been a private investor since the 1990s.

11 Comments on The Serious Disadvantages of Bitcoin

This article is factually incorrect, to the point that out is almost comical.

How many mainstream media outlets have recently published the truth about bitcoins alleged anonymity being illusory. Do you do the simplest of research before publishing? Anonymity is not and never was a feature of Bitcoin. The lack of a central bank is a bonus to anyone who is offended by the current fiat system or who cares that the value of our money (blood sweat and tears) is now in the of private banking interests.

I’m all for arguing the pros and cons of Bitcoin but you simply must do research before writing an article.

It is quite amazing how many mistakes you make:

“Bitcoin magnifies those risks because it can only be exchanged anonymously”. This is not true. It is in fact by far and wide the most accurately trackable system. Bitcoin is simply a public ledger including every single Bitcoin transaction ever. This ledger cannot be faked thanks in no small part to the NSA’s SHA-2 encryption. US agencies have been aware of the convenience of the “blockchain” for a long time. Learn about it.

“Digital QR codes make it vulnerable to theft. One Bloomberg TV anchor learned this the hard way. Transmuting digital Bitcoins into a paper medium means the QR code reveals their underlying location. Scanning that QR code means anyone can anonymously steal Bitcoins.” Not true. The QR code is for receiving transactions only. The Bloomberg anchor revealed his private key – a long code that you should not show anyone else, just like a password. Check the story properly.

“Mining Bitcoins is a health hazard and energy sink.” You typed your article on a computer didn’t you? Then you are risking your health as much as any Bitcoin miner. You interact with computers, period. Mining does take energy, and this is not only for producing Bitcoins – the primary purpose is to power the payment network. Any digital payment network today requires power. Ask VISA for example.

“An economy running on Bitcoin cannot expand to accommodate a larger population or natural resource base. A Bitcoin economy cannot grow because it cannot deploy excess capital for innovation.” Interesting visions of the future you have there. Everyone else is looking forward to a future with Bitcoin existing alongside unified national currencies.

“Minting copycat currencies is easy. Run through the gamut of crypto-currencies like Litecoin, Dogecoin, Namecoin, Peercoin, and others to see how unserious most crypto-currency enthusiasts are about money.” So what if some people like to get involved as a hobby? They are making models and Bitcoin is the professional version with the real-world network. What’s wrong with that?

“People who use currencies as a medium of exchange and store of value need them to have conservative characteristics, so that one unit today has pretty much the same value next year.” Bitcoin is becoming more stable as time goes by. Carefully study the charts at: http://bitcoincharts.com/. Also learn about the interesting applications of Bitcoin as an intermediary, offering low fee transactions of fiat currency.

“I may be a nerd but I’m far too intelligent to use something as stupid as Bitcoin.” You are no true nerd! ;)

Bitcoin certainly has significant risks and flaws but none of them have been adequately described here. This article is hyperbole and FUD and it would take a comment as long as the article itself to point out the errors and misconceptions.

None of these reasons even come close to outweighing the monetary incentives – significantly reduced cost of moving money around the world and for making payments. These factors are snowballing and will continue to snowball into the biggest self-fulfilling prophecy in the history of the world. Too many people can directly benefit from these reduced costs, or create a business that lives in the margin, for growth not to continue to snowball.

It sounds as if you have done no real research before writing this. Can you site any cases of Bitcoin Miners being harmed by heat stroke due to the heat of the machines? Gonna have to call your BS on that one. And my favorite part “Bitcoin enables fraud and other criminal activities,” please explain how cash is not used for criminal activities. I came hear to read your post, hoping for some competent arguments, or at least good writing and research. I was/am disappointed in you.

Oh, you are hilarious. Ransomware is the single biggest threat to your data security, and why? Ask yourself why it appeared in short order once there was a simple yet impossible to trace way to transfer the money from one country/person/criminal to another?
You can track a bag of money. Someone has to send it somewhere, someone has to collect it, someone has to move it. Bitcoin? Not so much.
Ransomware is the single biggest driver of Bitcoin prices.

This is the funniest article I have read about Bitcoin in quite some time. More shocking than the author’s ignorance, is that he figured out how to get this transfered from his typewriter on to the internet. But, if I made my living selling steam engines I would probably be warning people about how dangerous gasoline engines are also. Time will tell but I am sure your close to retirement age anyhow.